Economy: Weak input inflation and pullback in June trade (AXIS Capital)
Input inflation continues to fall and should exert downward pressure on CPI goods inflation hereafter. Meanwhile, trade trends are showing signs of weakness after a sustained improvement in recent months. On the one hand, the moderation in the global industrial cycle, as seen from manufacturing PMIs due to tighter financing conditions, could keep a lid on India’s goods exports growth. On the other hand, pockets of buoyant domestic demand and food inflation will likely dictate RBI’s pause.
June merchandise trade deficit fell by USD 2 bn to USD 20.1 bn, led by a weaker oil imports bill. Exports, in value terms, have slowed further, on ‘gems & jewelry’, engineering goods, and petroleum. Meanwhile, the imports bill was also weaker, led by oil, coal, machinery, and electronics. Our volume estimates for goods trade also indicate some pullback in exports and imports after witnessing a ramp-up in May. Weaker petroleum and engineering exports are seen in volume terms as well. Services exports and imports slowed YoY but were unchanged MoM. Services exports have averaged at USD 27.7 bn in the first half of 2023, viz. only USD 230 mn below the highs seen in the last quarter of 2022. More importantly, services exports on average are 40% stronger than 2019’s levels.
June WPI slowed further to (-)4.1% YoY vs (-)3.5% in May, led by the energy segment. Overall, the wholesale inflation in manufactured goods rose marginally, with eight of 22 sub-classifications showing higher inflation sequentially, led by basic metals and food.
What we think. While the correction in wholesale input prices continues, shocks to perishables in combination with stronger pricing power for firms indicated by PMIs should establish a bottom soon. Meanwhile, there is moderation indicated by trade in both value and volume terms. However, we should read the YoY trends with some skepticism due to the impact of the war. When we look at the exports and imports re-indexed to 2019, the trade data shows some resilience in value terms. In volume terms, there is some pullback, which could prove to be noise. We must see if Indian manufacturing gains export market share at a time when the trade pie may not grow and could shrink even for industrial goods due to tighter financing conditions.
…CAD/GDP expected at 1.1% of GDP in FY24 (Yes Bank)
tight band for the last three months is trading higher at ~ USD 80-81 pb. Market expectation of end of rate hiking cycle as also expectations of a policy boost for China has led to some bounce in the commodity space. Earlier, the top crude oil exporters including Saudi Arabia and Russia had announced a series of output cuts to support prices. But this failed to have any notable impact on prices as the focus was mainly on the slowing demand in the global economy. However, in its latest report, IEA has pointed out that the output cuts could lead to substantial deficits in global oil supplies starting from July, potentially pushing up prices.
OPEC has also recently hiked the demand estimate for oil for the globe for FY24. Above developments is a risk for India’s import bill. The external demand is weakening, reflective in weaker core export prints. After peaking in March (due to year-end seasonality) core exports have been on a glide path. Similarly on the imports side, core (NONG) imports have been on a moderating trend, possibly indicative of slowing growth in India too.
Microfinance:
Unlocking growth; empowering lives! (MPFSL)
The Indian MFI industry is entering the growth phase and we expect the industry to post a healthy 20%+ loan CAGR over FY23-25 along with a further improvement in asset quality and expansion in return ratios. The industry after facing both growth and asset quality disruptions during the Covid-19 period, reported a strong recovery in FY23 that is likely to pick up further pace in the coming years.
Growth trends recovering; industry size to increase to INR5.1t by FY25
The microfinance industry reported a healthy 24% CAGR over FY18-23 despite high inherent business cyclicality. Industry growth further improved in FY23, with total disbursements amounting INR3.0t of microfinance loans in FY23. Growth was driven by improving penetration in existing states and the expansion into new states. As per CRISIL, the microfinance industry is likely to post a CAGR of 18-20% over FY23-25 to INR5.1t, with NBFC-MFIs set to grow at a faster pace.
Microfinance – the fastest-growing retail product
Among major retail segments, microfinance loans have grown at a faster pace compared to other categories such as credit cards, housing loans and auto loans (see Exhibit 19). We believe that a large untapped market presents a significant growth opportunity for the industry. The share of microfinance loans within total credit stood at 1.3% as of FY23, up from 0.9% in FY18. Within retail loans, the mix of microfinance loans stood at 4.3% as of Mar’23, down from 4.6% as of Mar’22.
NBFC-MFIs to maintain growth leadership
NBFC-MFIs witnessed the fastest growth over FY18-23 with a 24% CAGR to INR1.4t as of FY23. Loans from banks/SFBs saw a CAGR of 9%/13% over FY20-FY23. Accordingly, the share of NBFC-MFIs in total microfinance loans improved to 40% in Mar’23 from 31% in Sep’19, while the share of banks/SFBs moderated to 34%/17%. As per CRISIL, the gross loan portfolio (GLP) of NBFC-MFIs is expected to grow at a faster pace of ~20-22% to ~INR2t by FY25.
Increasing penetration to further augment loan growth
Growth in the microfinance industry has been driven by an increase in the number of unique borrowers and a rise in the ticket size. We note that the number of loan accounts more than doubled to ~130m in FY23 from 57m in FY18, while the number of unique borrowers increased to 66m as of FY23 from 49m in FY19. We further note that MFIs’ presence in the fast-growing regions of North, Central and West remains considerably lower compared to other geographies; hence, we believe increasing penetration in these regions provides significant opportunities for growth and geographical diversification. Penetration remains low in key states, UP, Gujarat, Maharashtra and Rajasthan, and these markets can provide healthy growth opportunities over the medium to long term.
PAR-30 book moderates steadily; profitability set to improve
The microfinance industry witnessed a sharp deterioration in asset quality due to Covid-19. The PAR-30+ book, which stood at ~1.3% before Covid (Dec’19), increased to 14.8% in Jun’21 (2nd Covid wave). However, with improvement in the macro environment and the collection run rate, the PAR >30 book improved to 2.2% as of FY23. While NBFC-MFIs have taken a lead in the asset quality turnaround, we saw broad-based improvements in PAR-30 portfolios for most MFIs in FY23. A recovery in the profitability of the industry, a sustained uptick in collection efficiency and improvements in PAR ratios should help MFIs lower credit costs and drive healthy profitability over the medium term
Power Transmission: Grid
metamorphosis (ICICI Securities)
Indian transmission needs a makeover to accommodate higher proportion of renewables. The new grid is likely to have 500GW (+340GW) of RE capacity by 2030 (as per government targets). Essentially, this entails building a grid to evacuate power from these RE projects worth Rs2.5trn – equivalent to building the current grid. The National Committee on Transmission in recent meetings had finalised a large number of transmission projects worth Rs0.8trn in Rajasthan and Gujarat for evacuation renewables. As a result, we estimate projects worth Rs1.8trn have been recommended for implementation. Note that bidding is compulsory for all new transmission projects. The bidding pipeline has now swelled to Rs600bn, with the approval being received for Rs1.8trn, which includes 3 major HVDC projects worth Rs625bn.
Transmission pipeline has spiked to Rs1.8trn as of Jun’23: The National Committee on Transmission approved twenty (20) transmission projects worth Rs760bn on Jul 7, ’23. As a result, the total pipeline of projects has increased to Rs1.8trn as of Jun’23 with bid floated for projects worth Rs600bn. We expect bids of Rs250bn in FY24E and Rs350bn in FY25E (vs Rs126bn in FY23). Note that these opportunities are only for inter-state transmission projects.
3 HVDC projects under finalisation: 3 HVDC projects worth Rs820bn have been approved by the committee in the last two years. These projects are Leh Ladkah, Bhadla Fatehpur and Khavda – Nagpur with cost of Rs265bn, Rs127bn and Rs.241bn, respectively. Siemens and GE T&D are the likely beneficiaries of a pickup in HVDC projects, in our view.
RE capacity addition to drive transmission opportunity of Rs2.5trn: India has set an ambitious target to achieve 500GW (vs 170GW as of FY23) of renewable capacity by 2030. RE projects are usually located in remote areas, far from the national grid and hence pose a significant challenge in setting up the evacuation infrastructure. We expect transmission opportunity of Rs2.5trn while setting up this RE capacity. Note this opportunity does not include 125GW of RE capacity expected for green hydrogen production and intra-state transmission opportunities.
Regulatory issue is behind us; awarding likely to pick up: Transmission project awarding activity had taken a major hit in the recent past after an ESG-related litigation in the Supreme Court for projects in Rajasthan and Gujarat. However, after a positive ruling from the court, project awarding has already picked up from Q4FY23. Transmission awarding in FY23 stood at Rs126bn (vs Rs23bn in FY22).
Steel update (Indsec)
Steel: As per world steel association, the global steel production in May fell by 5% YoY to 161.6 MT this decline in production was due lower production in China, Europe, Japan, and USA. In June, the Indian crude steel production stayed flat as compared to May, at 11.28 MT. In June, the production of crude steel increased on MoM basis while the production and consumption of finished steel declined on MoM basis. Inventory of finished steel with steel producing companies increased by 5.5% MoM/42% YoY to 12.07 MT.
In June, India turned out to be net exporter of steel. The imports stood at 4.84 LMT which was a 5.9% increase on MoM basis and a 7.9% increase on YoY basis. Major contributors of these imports turnout to be China, Japan, and Korea, where China’s contribution in imports in India increased from 26.1% in June ’22 to 37% in June’23. This increase was due to their muted domestic demand.
Exports for the month declined to 27.6% MoM basis and by 21.3% YoY basis to 5.02 LMT this was due to subdued demand in Europe, also due to Vietnam and UAE preferring China’s cheap steel.
HRC prices for June stood at Rs. 55412/t which was a decline of 2298/t while the CRC stood Rs. 58500/t which Rs.3000/t. The decline was due to rising sustained Chinese imports. The coking coal prices continued to fall to $243/t which is $7/t lower from last month.
Overall, the Indian steel companies in June continue to get impacted by falling steel prices, declining exports and rising imports. In our view, the steel prices could remain rangebound. However, due to monsoon Q2FY24 would be a seasonally weak quarter. As per steel mint, the global steel prices have improved as result due to better economic conditions in Europe and the channel restocking expected in Europe due summer season. This higher global price will also make the imports expensive this by narrowing the gap between the domestic and import prices. Going forward, we expect the exports in Q2FY24 to be better due resurgence of demand in Europe. Media reports have hinted at a Chinese stimulus which could be supportive for steel prices.
Specialty chemicals on domestic drive, revenue seen growing 6-7% (CRISIL Ratings)
The Indian specialty chemicals sector will see revenue growth of 6-7% in fiscal 2024, with higher domestic demand (~60% of total revenue) driving up volume growth even as macroeconomic headwinds in the US and Europe subdue exports. Besides, realisations are expected to remain flattish this fiscal, which will have a moderating effect on the overall revenue growth.
Last fiscal, revenue growth had plunged to ~11% from 41% in fiscal 2022 owing to steep correction in realisations in the second half triggered by dumping from China, where consumption fell sharply owing to strict zero-Covid policy.
An analysis of 121 specialty chemical companies rated by CRISIL Ratings, accounting for nearly a third of the ~Rs 4 lakh crore industry, indicates as much.
That said, growth trends would be different across sub-segments, with the agrochemicals and fluorochemicals sub-segments (over ~35% of total revenues) likely to see double digit growth in fiscal 2024. Agrochemicals help improve nutrient in crops besides control pests, and has been growing at a steady pace, while fluorochemicals cater to niche emerging verticals such cold storage, semi-conductors, EV batteries, and hydrogen fuel cells. On the other hand, sub-segments such as dyes & pigments, personal care & surfactants, and flavours & fragrances (together contributing over 40% of total revenues) shall see relatively lower growth as their demand is linked to discretionary spending.
With realisations having bottomed out, higher sales volume and moderated crude-linked raw material prices will support operating margin, which is expected to stabilise at 14.0-14.5% this fiscal, almost similar to last fiscal.
Operating margin had fallen 300-350 basis points last fiscal following dumping by China. Some companies, especially in the polymer segment, suffered material inventory losses.
Capital expenditure (capex) is expected to remain high as manufacturers focus on augmenting capacity and expanding downstream to value-added products to seize opportunities emanating from Europe, where high labour cost makes local operations less competitive. This will be in addition to the continuing China+1 strategy adopted by global majors as part of their diversification strategy.
Steady cash generation and healthy balance sheets will ensure debt metrics remain adequate, despite higher debt for capex and incremental working capital lending stability to credit profiles.
China begins to export deflation (Elara Capital)
Lowest producer prices since CY15; consumer prices stagnate China’s producer price inflation (PPI) for June declined 5.4% YoY – levels last seen in CY15 in continuation of the deflationary trend since October 2022. Retail inflation stagnated in June and likely remains on course for deflation in the upcoming months. Barring the COVID period of CY20, China’s CPI is at the lowest level since the CY08 Global Financial Crisis. Falling crude and coal prices were the primary drivers of deflation in China’s PPI coupled with subdued demand for industrial products evident from new manufacturing orders index staying in contraction for three consecutive months and industrial capacity utilization below pre-COVID levels.
Our analysis using data since CY02 shows China’s PPI impacts exports to India with a three-month lag. The model with China’s PPI as the independent variable shows a 100bp fall or rise in PPI leads to a similar magnitude of rise or fall in exports to India at statistically significant levels. This indicates China’s producers are unable to fetch prices domestically and tend to offload inventory in healthier domestic markets.
While some sectors in India, particularly oil & gas, consumer electricals, auto and staples, should benefit given that falling prices of commodities such as oil, gas, copper, steel and edible and palm oil are beneficial, others, such as chemicals especially agro-chemicals, textiles, toys, and plastics, may face the heat of rising cheaper imports from China.
INR’s appreciation vs CNY further eroding India’s competitiveness: As China’s domestic markets fail to clear the produce and inventory, product dumping has intensified. Adding to the price differential is the appreciation of the INR against the CNY (the yuan), which appreciated 4.6% YTD, further eroding India’s competitiveness. While imports of China-based chemicals, especially agrochemicals, has increased in the past two months, our analysis shows price differential and continued deflation in China also have encouraged imports of items other than chemicals. The sectors that are most vulnerable to exports of China’s deflation are likely to see pain in the form of inventory losses.
Changing composition of India’s imports from China: We deep dive into data of India’simports from China during March-April 2023 to compare to the period when China’s domestic growth began to lose steam & the rate of producer price deflation began to intensify and analyze commodities where a sharp spike in import volume is visible.
Further signs of easing underlying inflation in the US (Danske Bank)
Overview: Inflation drivers continue to paint a mixed picture, but inflation is likely to head lower through 2023 in the US and euro area. Price pressures from food, freight and energy have clearly eased. Underlying inflation pressures even in the services sector have started to ease in the US, although wage pressures still remain elevated. In euro area, broader price pressures remain high, with tight labour markets continuing to point towards sticky core inflation going forward. We expect the ECB to hike rates two more times, and the Fed to hike a final time in July.
• Inflation expectations: Consumers’ short-term inflation expectations have edged lower especially in the US, but remain elevated. Markets’ longer-term expectations have moved modestly higher in the euro area, and remained stable in the US.
• US: The June CPI surprised to the downside in headline and core terms (both +0.2% m/m SA). Services sector disinflation continues on a broad basis, as core services ex. shelter and health care inflation slowed down for the 4th month in a row (+0.13% m/m, down from February high of +0.80%). Core goods inflation also stalled (-0.05% m/m), as positive contribution from used car prices eased. Shelter inflation continued to cool gradually, and while the latest ‘real-time’ rent measures (such as Zillow Observed Rent Index) have started to edge higher again, usual lags suggest shelter contribution will continue to moderate further over the coming months. With underlying inflation clearly easing, we doubt the Fed will hike rates beyond the July meeting.
